# Cisco Systems Inc. (NASDAQ:CSCO)

## Present Value of Free Cash Flow to the Firm (FCFF)

Intermediate level

In discounted cash flow (DCF) valuation techniques the value of the stock is estimated based upon present value of some measure of cash flow. Free cash flow to the firm (FCFF) is generally described as cash flows after direct costs and before any payments to capital suppliers.

### Intrinsic Stock Value (Valuation Summary)

Cisco Systems Inc., free cash flow to the firm (FCFF) forecast

US\$ in millions, except per share data

Year Value FCFFt or Terminal value (TVt) Calculation Present value at 11.35%
01 FCFF0 15,665
1 FCFF1 16,497  = 15,665  × (1 + 5.32%) 14,816
2 FCFF2 17,322  = 16,497  × (1 + 5.00%) 13,971
3 FCFF3 18,133  = 17,322  × (1 + 4.68%) 13,134
4 FCFF4 18,925  = 18,133  × (1 + 4.37%) 12,310
5 FCFF5 19,692  = 18,925  × (1 + 4.05%) 11,503
5 Terminal value (TV5) 280,717  = 19,692  × (1 + 4.05%) ÷ (11.35%4.05%) 163,985
Intrinsic value of Cisco Systems Inc.’s capital 229,720
Less: Debt (fair value) 26,293
Intrinsic value of Cisco Systems Inc.’s common stock 203,427

Intrinsic value of Cisco Systems Inc.’s common stock (per share) \$48.18
Current share price \$46.66

Based on: 10-K (filing date: 2019-09-05).

Disclaimer!
Valuation is based on standard assumptions. There may exist specific factors relevant to stock value and omitted here. In such a case, the real stock value may differ significantly form the estimated. If you want to use the estimated intrinsic stock value in investment decision making process, do so at your own risk.

### Weighted Average Cost of Capital (WACC)

Cisco Systems Inc., cost of capital

Value1 Weight Required rate of return2 Calculation
Equity (fair value) 197,012  0.88 12.52%
Debt (fair value) 26,293  0.12 2.62% = 3.22% × (1 – 18.48%)

Based on: 10-K (filing date: 2019-09-05).

1 US\$ in millions

Equity (fair value) = No. shares of common stock outstanding × Current share price
= 4,222,296,202 × \$46.66 = \$197,012,340,785.32

Debt (fair value). See details »

2 Required rate of return on equity is estimated by using CAPM. See details »

Required rate of return on debt. See details »

Required rate of return on debt is after tax.

Estimated (average) effective income tax rate
= (14.10% + 19.10% + 21.80% + 16.90% + 19.80% + 19.20%) ÷ 6 = 18.48%

WACC = 11.35%

### FCFF Growth Rate (g)

#### FCFF growth rate (g) implied by PRAT model

Cisco Systems Inc., PRAT model

Average Jul 27, 2019 Jul 28, 2018 Jul 29, 2017 Jul 30, 2016 Jul 25, 2015 Jul 26, 2014
Selected Financial Data (US\$ in millions)
Interest expense 859  943  861  676  566  564
Net income 11,621  110  9,609  10,739  8,981  7,853

Effective income tax rate (EITR)1 14.10% 19.10% 21.80% 16.90% 19.80% 19.20%

Interest expense, after tax2 738  763  673  562  454  456
Add: Cash dividends declared 5,979  5,968  5,511  4,750  4,086  3,758
Interest expense (after tax) and dividends 6,717  6,731  6,184  5,312  4,540  4,214

EBIT(1 – EITR)3 12,359  873  10,282  11,301  9,435  8,309

Short-term debt 10,191  5,238  7,992  4,160  3,897  508
Long-term debt, excluding current portion 14,475  20,331  25,725  24,483  21,457  20,401
Total Cisco shareholders’ equity 33,571  43,204  66,137  63,586  59,698  56,654
Total capital 58,237  68,773  99,854  92,229  85,052  77,563
Financial Ratios
Retention rate (RR)4 0.46 -6.71 0.40 0.53 0.52 0.49
Return on invested capital (ROIC)5 21.22% 1.27% 10.30% 12.25% 11.09% 10.71%
Averages
RR 0.48
ROIC 11.09%

FCFF growth rate (g)6 5.32%

Based on: 10-K (filing date: 2019-09-05), 10-K (filing date: 2018-09-06), 10-K (filing date: 2017-09-07), 10-K (filing date: 2016-09-08), 10-K (filing date: 2015-09-08), 10-K (filing date: 2014-09-09).

2019 Calculations

2 Interest expense, after tax = Interest expense × (1 – EITR)
= 859 × (1 – 14.10%) = 738

3 EBIT(1 – EITR) = Net income + Interest expense, after tax
= 11,621 + 738 = 12,359

4 RR = [EBIT(1 – EITR) – Interest expense (after tax) and dividends] ÷ EBIT(1 – EITR)
= [12,3596,717] ÷ 12,359 = 0.46

5 ROIC = 100 × EBIT(1 – EITR) ÷ Total capital
= 100 × 12,359 ÷ 58,237 = 21.22%

6 g = RR × ROIC
= 0.48 × 11.09% = 5.32%

#### FCFF growth rate (g) implied by single-stage model

g = 100 × (Total capital, fair value0 × WACC – FCFF0) ÷ (Total capital, fair value0 + FCFF0)
= 100 × (223,305 × 11.35%15,665) ÷ (223,305 + 15,665) = 4.05%

where:
Total capital, fair value0 = current fair value of Cisco Systems Inc.’s debt and equity (US\$ in millions)
FCFF0 = the last year Cisco Systems Inc.’s free cash flow to the firm (US\$ in millions)
WACC = weighted average cost of Cisco Systems Inc.’s capital

#### FCFF growth rate (g) forecast

Cisco Systems Inc., H-model

Year Value gt
1 g1 5.32%
2 g2 5.00%
3 g3 4.68%
4 g4 4.37%
5 and thereafter g5 4.05%

where:
g1 is implied by PRAT model
g5 is implied by single-stage model
g2, g3 and g4 are calculated using linear interpoltion between g1 and g5

Calculations

g2 = g1 + (g5g1) × (2 – 1) ÷ (5 – 1)
= 5.32% + (4.05%5.32%) × (2 – 1) ÷ (5 – 1) = 5.00%

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= 5.32% + (4.05%5.32%) × (3 – 1) ÷ (5 – 1) = 4.68%

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= 5.32% + (4.05%5.32%) × (4 – 1) ÷ (5 – 1) = 4.37%